Since the stock market volatility of October, my financial planner friends and I have been pretty crabby. “Well, of course,” you say, “down stock markets are terrible for investment advisors.”
Nope, that’s not the problem at all. Getting mad at the stock market for going down is like being angry at a toddler whose nap you skipped to run errands and is now having a meltdown at the grocery store. It’s the grown-up’s reaction that needs to be managed.
Who is the grocery store grown-up in the down stock market analogy? Hopefully it’s the investor. Handling the temporary fit in a calm manner and going about her business. But some days I have my doubts.
The stock market goes down some years/months/days/hours/weeks. It MUST go down occasionally in order for it to go up. Down stock markets are healthy, regular, and to be expected for good overall economic health.
If there is no risk, there is no reward.
If you don’t experience losses sometimes, there is no reason to expect gains. You’ve heard it all before. You tell your financial advisor that you are ready to take risk and get growth in your investments. And yet..
You still are tempted to make the same bonehead moves every time the stock market experiences a down day. You call your advisor and ask to move all your money to cash when the US stock market goes down by 3%. When, of course, your advisor didn’t have you in all US stocks to begin with because he forced you into a diversified portfolio even though you WANTED to be all in US stocks 3 months ago because that’s what has performed the best the last 2 years. Geesh! You see where this is going?
It’s not the market, it’s the investor that is the problem.
So, please, for the sake of your investment advisor’s sanity, remember just two factoids:
In the twenty years preceding 12/31/2015, the S&P 500 averaged 9.85%/year compared to the average investor return of 5.19%/year. * This is because investors tend to put more money into investments when they are high and pull money out when markets are low. Buying high and selling low is no way to make money – ask any store owner.
You never know when to get back in after you’ve bailed out. Missing a few great days can lead to sub-par performance over decades. For example, a hypothetical (because it NEVER happens) investor remained invested in the S&P 500 Index from 1998 to 2017 (5,036 trading days) would have earned a 7.20% annualized return. Miss the 5 best performing days and the annual return shrank to 5.02%. Miss the 20 days best days, the returns were cut down to just 1.15%. If the 40 best-performing days were missed, an investment in the S&P 500 turned negative, with $10,000 dropping to $5,670. **
If you’d like a professional to help you craft a diversified portfolio you can live with for the long run, with occasional rebalancing, e-mail me to set up an appointment.
Just not right now. I’m in a bad mood.
*Source: https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519
**Sourcehttps://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/
